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Bunkers UP. Some tanker rates UP… But not by enough to stop the doom and gloom..

By • Aug 17th, 2012 • Category: Tankers

The Coracle tanker market podcast for Aug 10, 2012 in association with Braemar-Seascope

Thanks for downloading the Tanker Market report podcast from Coracle and Braemar Seascope for Aug 17th 2012. This report looks at the VLCC, Suezmax, Aframax and clean products markets.

The benchmark Brent crude price rose this week, staying near a three-month high above $116/bbl on concerns over disruptions to supply from the Middle East and a steeper-than-expected drawdown in oil stocks in the world’s top consumer, the United States. Worries about a conflict over Iran’s disputed nuclear programme escalate but the shipping markets, manacled by massive oversupply is unable to shake off the malaise. VLCC owners face rising bunker prices without improving market rates, causing daily earnings to remain very, very depressed. Thus far the sabre rattling of the Iranians threatening to close the straits of Hormuz has failed to materialise. However, one must never discount this eventual possibility. Saudi Arabia has additional capacity to switch a certain amount of export to Red Sea ports, but nothing compared to that of the AG.

Over the previous week, VLCC rates had shown a slight improvement, moving up from 270 at 33 up to 39 for the east. However, it didn’t take long for rates to slip back to 265 at 35.5. Even with an escalating bunker price, AG/West has remained steady at 280 at 23, pushing the theoretical “returns” to minus $20,000/day. Going west at these rates, owners need a significant freight from the Caribbean to recover their money. It is difficult to see how any improvement in the present market might occur.

Loading in West Africa for China discharge has continued to attract owners’ interest despite the long period of employment at poor rates, meaning that owners do not foresee any significant improvement. West Africa/USG continues to be fixed on Suezmaxes due to their flexibility and their similarly depressed market situation. In the Atlantic, the Indian charterers had a relatively quiet week, with IOC re-entering the market for an Angola/EC India stem after running into trouble clearing the vessel they had initially fixed at $2.95m. Charterers eventually ended up maintaining the vessel after managing to clear the outstanding issues. With a fair amount of cargoes still remaining for September loading from the Indian charterers from both the Caribs and West Africa, we expect the coming week to show more activity. It will also be interesting to see if the escalated bunker prices are reflected with an increase in the rates.

The 30 day availability index shows 60 VLCCs arriving at Fujairah, of which ten are over 15 years old. August has provided 108 fixtures from the AG so far, however we do expect a few more to come off end-month dates. So far we have 11 fixtures reported from the AG for September but, rather ominously, at least 20 VLCCs will hang over from the previous month.

Now the Suezmax sector and whilst it may be premature to suggest the market has recovered, rates have certainly given owners some welcome respite. After settling at 55 to the UKC-Med, West Africa rates slowly picked up, gaining momentum throughout the week. Firstly, 57.5 was fixed to Spain, then this was matched to the U.S.A.C. and the market finally reached the heady heights of 60 on one fixture to UKC-Med. Charterers will are still achieving 55 to the US Gulf, however the large number of cargoes working the first decade out of West Africa may turn this around. Yes, the position list is still healthy, but if there was ever a time for owners to take advantage and try and heave the market back up, this is it. Charterers are recognising this, with one looking to take advantage of low rates before the market adjusted, fixing three back to back cargoes at 57.5 to the US.A.C.

The Black Sea rate of 140 at 55 to the UKC-Med was maintained throughout the week. A low level of activity due to charterers finishing August dates led to few cargoes and the market having zero impetus. The majority of action was taking place cross-Med but still following pretty closely in line. Out in the Middle East, the AG has been very active. Worldscale 42.5 to go west was the going rate as we finished last week, with 43.5 done promptly thereafter. The volume of cargoes, combined with a shorter position list, contrived to force rates upwards to 49. Increasing upward pressure are the number of further cargoes in the market at present, with charterers piling first decade cargoes in one after another and although it is higher than might be expected, it is little surprise the market responded with a 67.5. The potential issues from the owners’ point of view are that the VLCC market may now come into play if charterers can manage to put the cargoes together and Mediterranean ships ballasting through looking to take advantage of the strength in the market.

Next we look at the Aframaxes and another week has passed and unfortunately earnings in the North Sea and Baltic have taken another hit, with Baltic freight rates now at a record low. TD17 is the Baltic Exchange route for 100 Baltic/UKC and it currently remains flat at 60, which by most calculations is below operating costs. There only remain a handful of stems left to cover from Primorsk for August, and with fuel oil demand fairly low also, it is difficult to see a change.

In the Med and as expected, August is proving to be a very tough month for owners. If lucky, one might find themselves with a short ballast leg and low port costs, meaning they might just turnover a meagre profit. With bunkers continuing to rise, most owners will soon be employing damage limitation exercises, whereby they will have to weigh up the costs of sitting idle against the negative returns of a particular cargo. There is such an abundance of available vessels currently for the Mediterranean and Black Sea, as well as limited enquiry, that the only question on everyone’s mind is: how low can it go on? With rates wavering at 80 at 77.5 for cross-Med and 79 from the Black Sea, even the eternal optimists will be struggling to see the light at the end of this tunnel.

In the eastern hemisphere, the Aframax market has been active and rates have posted slight gains in the AG and Far East as charterers take aim to cover early September cargoes. Charterers are currently gearing up to cover early September stems and owners’ ideas are firming in line with rising bunker prices. However, an overhang of tonnage will prove challenging to overcome. Demand for condensate in the Asia Pacific region has been weak despite stronger naphtha cracks and at least two North West Shelf cargoes remain unsold for September lifting. Back haul rates for no heat crude from North West Shelf to Singapore are in the high 70’s.

Now we’ll look at the clean markets and East of Suez, for the LR2s, there has been just about enough activity to keep the market engaged this week, however rates have slipped further south on the back of a weak front end position list. By this, we are referring to the five all singing all dancing coated LR2s looking for cargoes prompt until the end of the month. Their fear looks like it has become a reality at the moment. There aren’t enough cargoes left for all these ships. AG/Japan is on subs at 100, which, compared to the last done levels, shows the panic of those caught prompt with tonnage to move. And there are still ships that are looking for employment. In a different breath there is also some hope for this market, in our opinion. The tonnage list beyond the turn of the month actually looks pretty well-balanced if everything gets its subs. Reliance have paid $2.4m for WC India/UKC off 5-11 September on a boat with 3rd last cargo crude and this shows there is a potential for rates to reignite, but until we see these 4 or 5 August positions fixed away, the market will not recover. We do not foresee the market going any lower, and it will recover, but this is dependent on the speed that the market clears out these leftover positions.

In the West and a plethora of mid-week activity followed, and preceded by nervous silences seems to have been the script for this week. Gasoline and its components were wide open from NWE to the States, although naphtha remained flat and continued to be sold into the domestic European barging market. We estimate an extra 40% more vessels from this time last week were trans-Atlantic TC2 fixtures and rates are up 12 points from Monday, settling at 37 at 125, or less in some cases. In addition, several UKC/West Africa requirements became ‘distressed’ as charterers were unwilling to pay up and dropped into the LR1 sector instead, paying 60 at 100. We should remember that even at this peak of 37 at 125, earnings on a round trip basis barely touch $6,000/day. ‘How long will the peak last in TC2?’ I hear you ask. Well, there is some thought that it will last a little longer than previous jumps, due to this being end August dates and time sensitivity and August pricing being of issue. This, coupled with further out than usual fixing due to possible nervousness, might allow a longer duration of spike. If that wasn’t thought provoking enough, September paper traded up on TC2 at 135, which does beg the question: would you sell or buy?

Thanks for listening